<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the quarterly period ended March 31, 1999 or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the transition period from to
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Commission file number 0-24411
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MASTER GRAPHICS, INC.
---------------------
(Exact name of registrant as specified in its charter)
Tennessee 62-1694322
------------ ------------
(State or Other Jurisdiction (I. R. S. Employer
of Incorporation or Organization) Identification No.)
6075 Poplar Avenue, Suite 401, Memphis, TN 38119
- ------------------------------------------ ----------
(Address of principal executive offices) (Zip Code)
(901) 685-2020
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, $0.001 Par Value, 7,923,026 shares as of May 12, 1999.
----------
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets, December 31, 1998 and
March 31, 1999................................................... 3
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 1998 and 1999............................. 4
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1998 and 1999............................. 6
Notes to Condensed Consolidated
Financial Statements............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 18
Item 2. Changes in Securities and Use of Proceeds........................ 18
Item 6. Exhibits and Reports on Form 8-K................................. 18
Signatures................................................................ 19
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
MASTER GRAPHICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------- ---------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents............................................. $ 13,525 $ 0
Trade accounts receivable, net........................................ 38,529 44,491
Inventories:
Raw materials and supplies..................................... 2,909 3,915
Work-in-process................................................ 5,186 9,692
-------- -------
Total inventories............................................ 8,095 13,607
Deferred income taxes................................................. 1,057 1,057
Other current assets.................................................. 4,012 6,246
-------- -------
Total current assets......................................... 65,218 65,401
Property, plant and equipment, net....................................... 75,251 88,346
Goodwill, net............................................................ 64,469 90,396
Deferred loan costs, net................................................. 1,352 1,532
Other.................................................................... 1,586 1,934
-------- --------
Total assets................................................. $207,876 $247,609
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of long-term debt................................ $ 924 $ 3,278
Accounts payable...................................................... 10,829 16,960
Accrued expenses...................................................... 5,540 5,800
-------- --------
Total current liabilities..................................... 17,293 26,038
Long-term debt, net of current installments............................... 144,223 173,839
Deferred income taxes..................................................... 7,554 8,259
Other liabilities......................................................... 1,177 888
Redeemable preferred stock................................................ 1,437 1,467
Commitments and contingencies
SHAREHOLDERS' EQUITY:
Common stock ($0.001 par value; 100,000,000 shares authorized;
7,879,997 shares issued and outstanding at December 31, 1998 and
7,923,026 shares issued and outstanding at March 31, 1999)........... 8 8
Additional paid-in capital............................................. 39,843 40,046
Retained earnings (deficit)............................................ (3,659) (2,936)
-------- -------
Total shareholders' equity.................................... 36,192 37,118
-------- -------
Total liabilities and shareholders' equity.................... $207,876 $247,609
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1999
------- -------
<S> <C> <C>
Net revenue............................................................... $28,020 $56,378
Cost of revenue........................................................... 20,654 40,763
------- -------
Gross profit.................................................. 7,366 15,615
Selling, general and administrative expenses.............................. 4,865 9,908
------- -------
Operating income.............................................. 2,501 5,707
Other income (expense):
Interest expense.............................................. (2,248) (4,674)
Other, net.................................................... 186 287
------- -------
Income before income taxes.............................. 439 1,320
Income tax expense (benefit).............................................. (4) 567
------- -------
Net earnings ................................................. $ 443 $ 753
======= =======
Basic earnings per share:
Net earnings ................................................. $ 0.11 $ 0.09
======= =======
Diluted earnings per share:
Net earnings ................................................. $ 0.10 $ 0.09
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings .................................................................................... $ 443 $ 753
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization................................................................. 1,174 2,418
Changes in operating assets and liabilities, net of effect of business acquisitions:
Trade accounts receivable............................................................... (3,162) (651)
Inventories............................................................................. 494 (2,389)
Other assets............................................................................ (107) (1,632)
Accounts payable........................................................................ (372) 3,154
Accrued expenses........................................................................ (83) (637)
------- --------
Net cash provided by (used in) operating activities.................................. (1,613) 1,016
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Business acquisitions, net of cash acquired...................................................... (30,822) (31,562)
Purchases of equipment........................................................................... (173) (1,662)
Repayment of shareholder note receivable......................................................... 116 --
------- --------
Net cash used in investing activities................................................ (30,879) (33,224)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings on lines of credit................................................................ 169 2,628
Proceeds from issuance of long-term debt......................................................... 37,113 17,770
Issuance of common stock to finance acquisitions................................................. 0 203
Principal payments on long-term debt............................................................. (621) (1,669)
Loan costs incurred.............................................................................. (500) (249)
------- --------
Net cash provided by financing activities............................................ 36,161 18,683
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................................ 3,669 (13,525)
CASH AND CASH EQUIVALENTS, beginning of period...................................................... 1,174 13,525
CASH AND CASH EQUIVALENTS, end of period............................................................ $ 4,843 $ 0
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
(1) Basis of Presentation
The accompanying condensed consolidated financial statements of Master Graphics,
Inc. and its subsidiaries (collectively "Company") are unaudited and have been
prepared in accordance with generally accepted accounting principles for interim
financial information and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements as of and for the year ended December 31,
1998.
In the opinion of the Company, the accompanying condensed consolidated financial
statements contain all adjustments (consisting of only normal, recurring
adjustments) necessary to present fairly the financial position, results of
operations, and cash flows of the Company as of the dates and for the periods
presented.
Because of the seasonal nature of the Company's business, the results of
operations for the periods presented are not necessarily indicative of the
results of operations for a full fiscal year.
Effective January 1, 1998, the Company changed its fiscal year-end to December
31. Prior to 1998, the Company's fiscal year ended on June 30.
On May 14, 1998, the Board of Directors of the Company approved a 40,000 to 1
stock split. All references to share and per share amounts in these condensed
consolidated financial statements have been retroactively restated to reflect
the stock split.
The accompanying unaudited condensed consolidated financial statements of the
Company include the results of operations of Master Graphics, Inc. and its
subsidiaries, on a consolidated basis. All intercompany balances and
transactions have been eliminated in the consolidation.
(2) Earnings Per Share
Basic earnings per share are calculated by dividing net earnings less preferred
stock dividend and discount accretion by the weighted average number of common
shares outstanding. For the three months March 31, 1998 and 1999, the basic
weighted average shares outstanding were 4,000,000 and 7,894,818, respectively.
For the three months ended March 31, 1999, conversion of the preferred stock is
not assumed in the diluted earnings per share calculations as the effect is
anti-dilutive on an incremental basis. For the three months ended March 31,
1998, exercise of seller warrants is not assumed because their effect would be
anti-dilutive using the treasury stock method. For the three months ended March
31, 1999, exercise of employee stock options, the deferred compensation plan and
seller warrants are not assumed because their effect would be anti-dilutive
using the treasury stock method. For the three months ended March 31, 1998 and
1999, the diluted weighted average shares outstanding were 4,444,440 and
8,114,818, respectively.
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Income Shares Per-Share
THREE MONTHS ENDED MARCH 31, 1998 (Numerator) (Denominator) Amount
--------------------------------- ----------- ------------- -----------
<S> <C> <C> <C>
Net earnings $443
Less: Redeemable preferred stock dividends --
Less: Redeemable preferred stock discount --
------
BASIC EARNINGS PER SHARE
Income available to common shareholders 443 4,000,000 $ 0.11
===========
EFFECT OF DILUTIVE SECURITIES
Lender Warrants 444,440
----------
DILUTED EARNINGS PER SHARE
Net earnnings available to common
shareholders plus assumed conversions 443 4,444,440 $ 0.10
=======================================
<CAPTION>
Income Shares Per-Share
THREE MONTHS ENDED MARCH 31, 1999 (Numerator) (Denominator) Amount
--------------------------------- ----------- ------------- -----------
<S> <C> <C> <C>
Net earnings $753
Less: Redeemable preferred stock dividends 30
Less: Redeemable preferred stock discount 30
------
BASIC EARNINGS PER SHARE
Income available to common shareholders 693 7,894,818 $ 0.09
===========
EFFECT OF DILUTIVE SECURITIES
Lender Warrants 220,000
-------
DILUTED EARNINGS PER SHARE
Net earnings available to common
shareholders plus assumed conversions 693 8,114,818 $ 0.09
=========================================
</TABLE>
Dollars in thousands except per share amounts
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1999
(Unaudited)
(3) Acquisitions and Financings
In March 1999, the Company acquired all of the outstanding stock of Woods
Lithographics, Inc. and Columbia Graphics Corporation and a significant portion
of the operating assets of White Arts, Inc. All of these businesses are engaged
in general commercial printing. These acquisitions were paid for with a
combination of cash ($16.7 million) and 43,029 shares of common stock ($.25
million). These acquisitions have been accounted for by the purchase method and,
accordingly, the results of operations of Woods Lithographics, Columbia and
White Arts have been included in the Company's 1999 consolidated financial
statements from their respective acquisition dates. The excess of the purchase
prices over the fair value of the net identifiable assets acquired is
approximately $14.3 million, which has been recorded as goodwill and is being
amortized on a straight-line basis over 40 years.
The following unaudited pro forma financial information presents the combined
results of operations of the Company and the acquired businesses, as if the
acquisitions had occurred at the beginning of the periods presented. Pro forma
amounts for 1998 also include the effects of the 1998 acquisitions and of the
1999 acquisitions described above. Effect has been given to certain adjustments,
including amortization of goodwill, adjusted depreciation expense and increased
interest expense on debt related to the acquisitions. The pro forma financial
information does not necessarily reflect the results of operations that would
have occurred had the Company and the acquired businesses constituted a single
entity during such periods.
Three months ended March 31,
----------------------------
1998 1999
---- ----
Net revenue $65,272 $62,313
Net earnings 31 360
============================
Basic earnings per share $ 0.01 $ 0.05
============================
Diluted earnings per share $ 0.01 $ 0.04
============================
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1999
(Unaudited)
(4) Long-Term Debt
The following is a summary of the Company's long-term debt instruments (in
thousands) as of:
December 31, March 31,
1998 1999
------------ ---------
Senior Notes................................ $130,000 $130,000
Credit Facilities:
Term Debt............................... 262 18,500
Working Capital Debt.................... 0 2,628
Sellers' notes.............................. 16,599 15,612
Other....................................... 2,919 14,793
-------- --------
149,780 181,533
Less unamortized debt discount.............. 4,633 4,416
-------- --------
145,147 177,117
Less current maturities..................... 924 3,278
-------- --------
$144,223 $173,839
======== ========
In March 1999, the Company entered into a Third Amended and Restated Loan and
Security Agreement with General Electric Capital Corporation, as agent for
itself and other lenders. Pursuant to the agreement, the credit facility
consists of two term loans ("Term Loan A" and "Term Loan B") each of $30 million
and a revolving credit facility ("Revolver") of $20 million. Term Loan A bears
interest, payable monthly, at a floating rate equal to LIBOR plus 2.5% (7.4% at
March 31, 1999), and Term Loan B bears interest, payable monthly, at a floating
rate equal to LIBOR plus 3.0% (7.9% at March 31, 1999). Term Loan A matures in
March 2004, and principal is payable based on a five year amortization. Term
Loan B matures in March 2005 with quarterly principal payments based on amount
of principal outstanding with a final balloon payment at maturity. The annual
amortization of the $18.5 million ($9.25 million under each of Term Loan A and
Term Loan B) outstanding at March 31, 1999 will approximate $2.6 million for
each of the next five years. The Revolver, which contains certain borrowing base
limitations, bears interest at LIBOR plus 2.5% and is repayable in full in March
2004. There was $2.6 million outstanding under the Revolver as of March 31,
1999.
The security for the facility includes a lien on all of the assets of Premier
Graphics, Inc., Master Graphics' sole subsidiary, as well as a pledge by Master
Graphics of all of the outstanding stock of Premier Graphics. The facility
includes a prepayment penalty of 3% of the amount prepaid during the first year
of the loan, 2% during the second year, 1% during the third year, and no
prepayment penalty after March 2002.
Under the facility, the Company is required to maintain certain financial tests
and ratios including, but not limited to a covenant requiring a minimum level of
prepayment to Term Loan A and Term Loan B based on 50% of annual excess cash
flow, as defined.
In connection with the Company's acquisition of White Arts and Woods
Lithographics in March 1999, the Company assumed approximately $5.3 million of
indebtedness owed by those acquired companies. That indebtedness is classified
above as "other" long-term debt. The remainder of the Company's "other"
long-term debt consists of approximately $7 million of indebtedness owed to
former owners of an acquired company, approximately $2 million in capital lease
obligations, and other miscellaneous items of indebtedness.
(5) Property, Plant and Equipment
The following is a summary of the Company's property, plant and equipment (in
thousands) as of:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ ---------
(unaudited)
<S> <C> <C>
Land.............................................. $ 486 $ 786
Buildings......................................... 3,830 4,593
Leasehold improvements............................ 1,115 1,144
Machinery and equipment........................... 75,602 88,860
Furniture and fixtures............................ 3,331 3,643
Vehicles.......................................... 1,374 1,236
-------- --------
85,738 100,262
Less accumulated depreciation .................... 10,487 11,916
-------- --------
$ 75,251 $ 88,346
======== ========
</TABLE>
<PAGE>
MASTER GRAPHICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
MARCH 31, 1999
(Unaudited)
(6) Wholly-owned Operating Subsidiary
Master Graphics is a holding company with no operating assets or operations.
Premier Graphics, its only subsidiary, is the primary obligor for the Senior
Notes and the credit facility with General Electric Capital Corporation, as
agent. The Senior Notes are fully and unconditionally guaranteed by Master
Graphics. Following is summarized combined financial information of Premier
Graphics as of December 31, 1998 and March 31, 1999 and for the three months
ended March 31, 1998 and 1999 (in thousands).
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1999
----------------- --------------
<S> <C> <C>
Balance sheet data:
Current assets.......................... $ 62,956 $ 61,134
Property, plant and equipment........... 74,943 88,165
Goodwill, net........................... 63,771 90,228
Due from Shareholder.................... 46,025 72,690
Other non-current assets................ 1,523 616
------- -------
Total assets........................ $249,218 $312,833
======= =======
Current liabilities, including current
installments of long-term debt of
$924 and $3,278 in 1998 and 1999..... $ 16,327 $ 26,783
Long-term debt, net..................... 127,624 158,444
Other liabilities....................... 3,551 3,613
------- -------
Total liabilities................... 147,502 188,840
Stockholders' equity.................... 101,716 123,993
------- -------
Total liabilities and stockholders'
equity................................ $249,218 $312,833
======= =======
<CAPTION>
Three months ended Three months ended
March 31, 1998 March 31, 1999
------------------ ------------------
<S> <C> <C>
Statement of operations data:
Net revenues........................ $28,020 $56,378
Gross profit........................ 7,366 15,615
Operating income.................... 2,501 6,163
Interest expense.................... 2,011 4,196
Income tax expense (credit)......... (4) 567
Net earnings........................ 443 1,687
</TABLE>
The following unaudited pro forma financial information presents the
combined results of operations of Premier Graphics and the businesses acquired
in 1998 and 1999 as if the acquisitions and related financings, including the
initial public offering of Master Graphics common stock and the Senior Notes
offering had occurred as of January 1, 1998 and January 1, 1999 after giving
effects to certain adjustments, including amortization of goodwill, adjusted
depreciation expense and increased interest expense on debt related to the
acquisitions. The pro forma financial information does not necessarily reflect
the results of operations that would have occurred had Premier Graphics and the
acquired businesses constituted a single entity during such periods (in
thousands).
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1999
------- -------
<S> <C> <C>
Net revenue......................... $65,272 $62,313
Operating income.................... 5,318 5,879
Depreciation and amortization....... 2,210 2,281
Net earnings........................ 31 1,272
</TABLE>
Management believes that there are specific items included in the acquirees'
results of operations which are non-recurring and which, if removed from the pro
forma results noted above, would increase earnings by $.8 million and $.2
million for the three month periods ended March 31, 1998 and 1999, respectively.
(7) Subsequent Event
In April 1999, the Company acquired all of the outstanding common stock of
Eagle Direct Inc. The acquisition was paid for with cash ($9.1 million). The
acquisition will be accounted for by the purchase method and, accordingly, the
results of operations will be included in the Company's 1999 consolidated
financial statements from the acquisition date in 1999.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE RISKS AND UNCERTAINTIES. READERS ARE CAUTIONED THAT SUCH INFORMATION
INVOLVES KNOWN AND UNKNOWN UNCERTAINTIES, INCLUDING THOSE CREATED BY GENERAL
MARKET CONDITIONS, COMPETITION AND THE POSSIBILITY THAT EVENTS MAY OCCUR WHICH
LIMIT OUR ABILITY TO MAINTAIN OR IMPROVE OUR OPERATING RESULTS OR EXECUTE OUR
GROWTH STRATEGY OF ACQUIRING ADDITIONAL BUSINESSES. ALTHOUGH WE BELIEVE THAT THE
ASSUMPTIONS UNDERLYING THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, ANY OF THE
ASSUMPTIONS COULD BE INACCURATE, AND THERE CAN THEREFORE BE NO ASSURANCE THAT
THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN WILL PROVE TO BE ACCURATE. THE
INCLUSION OF SUCH INFORMATION SHOULD NOT BE REGARDED AS A REPRESENTATION BY US
OR ANY OTHER PERSON THAT OUR OBJECTIVES AND PLANS WILL BE ACHIEVED.
<PAGE>
MATERIAL CHANGES IN FINANCIAL CONDITION
From December 31, 1998 to March 31, 1999, we utilized our excess cash from the
issuance of $130 million of 11.5% Senior Notes due 2005 to fund acquisitions. As
a result, our working capital position declined by approximately $8.6 million.
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth certain unaudited consolidated financial data for
the periods indicated (dollars in millions) and such results as a percentage of
revenue.
Three months ended
March 31,
-------------------------------------------
1998 1999
-------------------- -------------------
Revenue.............................. $ 28.0 100.0% $ 56.4 100.0%
Gross profit......................... 7.4 26.4 15.6 27.7
Selling, general and administrative
expenses........................... 4.9 17.5 9.9 17.6
Operating income..................... 2.5 8.9 5.7 10.1
Interest and other expense........... 2.1 7.5 4.4 7.8
Net earnings (loss).................. $ .4 1.4% $ 0.8 1.4%
- -----------------
Three Months Ended March 31, 1999 Compared to Three Months Ended
March 31, 1998
Revenue. Revenue increased approximately 101% from $28.0 million for the
three months ended March 31, 1998 to $56.4 million for the three months ended
March 31, 1999. Revenue growth was attributable primarily to the implementation
of our acquisition strategy.
Gross Profit. Gross profit increased from $7.4 million for the three
months ended March 31, 1998 to $15.6 million for the three months ended March
31, 1999. The increase in gross profit was attributable primarily to the
implementation of our acquisition strategy. Gross profit as a percentage of
sales increased to 27.7% for the three months ended March 31, 1999, from 26.4%
in the corresponding period of the prior year. This improvement, which is
partially attributable to the mix of operating divisions acquired, also reflects
the effects of our consolidated buying programs which accounted for
approximately 60% of the gross profit percentage improvement.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased from $4.9 million for the three months ended
March 31, 1998 to $9.9 million for the three months ended March 31,1999. Selling
expenses increased with increasing revenue mentioned above and general and
administrative expenses increased in conjunction with our acquisition strategy
and execution of our business plan.
Interest Expense and other expense. Interest and other expense increased
from $2.1 million for the three months ended March 31, 1998 to $4.4 million for
the three months ended March 31, 1999. A substantial portion of the purchase
price for each of our acquisitions was financed with debt. Accordingly, the
increase in interest expense is primarily attributable to our acquisition
program and related financing activities. In addition, the increase reflects the
effects of issuance of $130 million of 11.5% Senior Notes due 2005 by Premier
Graphics.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Our primary cash requirements are for debt service, capital expenditures,
acquisitions and working capital. Historically, we have financed our operations
and equipment purchases with cash flow from operations, capital leases and
secured loans through commercial banks or other institutional lenders and credit
lines from commercial banks. We have financed our acquisitions primarily with
funds under a credit facility as well as subordinated notes payable to former
owners of the acquired companies. Working capital on March 31, 1999 was $39.4
million, a decrease of $8.6 million from December 31, 1998.
Our largest source of capital for acquisitions has been debt financing including
the $130 million of 11.5% Senior Notes due 2005 as well as our senior credit
facility which originally closed in September 1997 and which has been revised
from time to time, most recently being revised in March 1999. Footnote 4 to
the condensed consolidated financial statements included herein provides a brief
description of the revised credit facility.
As part of the respective purchase agreements, we have agreed to pay the former
owners of twelve of the acquired companies additional purchase price
consideration if such companies surpass certain EBITDA-based targets, which
generally exceed the pre-acquisition performance levels of those companies.
Reaching these targets will result in additional cash inflow to us arising from
the incremental EBITDA above the targets and additional cash outflow from the
consideration required to be paid. The periods for which the targets will be
measured vary for each of the companies, and the measurement periods range from
one year to five years of operations. For some of the companies, additional
consideration will be payable by us annually for each year in which the EBITDA-
based target is surpassed, and for other companies, only a single lump sum
payment will be made by us if the performance of the company exceeds the target.
The maximum additional purchase price consideration payable to the former owners
of eleven of the companies is limited to a specified amount. The amount of
additional consideration payable to the former owners of the other company is
not limited once the EBITDA-based target is surpassed. We will pay former owners
at least $8 million of additional purchase price consideration in 1999.
Thereafter, assuming that the former owners become entitled to receive the
maximum amount of additional purchase price consideration at the earliest
possible time, we would pay the former owners, over $17.9 million in 2000, over
$4.1 million in 2001, $6.5 million in 2002 and $15.0 million in 2003. One-half
of the $15.0 million payable in 2003 according to the preceding sentence would
be payable in shares of our Common Stock. Otherwise, additional purchase price
consideration is payable in cash. Any additional purchase price consideration
will be recorded as additional goodwill and amortized into income over
approximately 40 years.
We anticipate that our cash flow from operating activities will provide cash
adequate to finance our normal working capital needs, debt service requirements
and planned capital expenditures for property and equipment which is currently
anticipated to be approximately $5 million annually, no material amount of which
is under firm commitment. Master Graphics is dependent upon the cash flow of
and the transfer of fund from Premier Graphics, its operating subsidiary,
which, under its various credit facilities, is subject to restrictions on its
ability to pay dividends to Master Graphics and is generally limited by specific
amounts or amounts in relation to the profitability of Premier Graphics. To the
extent that cash flow from operating activities is insufficient to fund the
payment of any additional purchase price consideration, we intend to finance the
payment of such consideration through our credit facilities.
We currently believe that our existing cash balances, funds available under our
credit facility and funds expected to be generated from operations will provide
sufficient funds to finance our operations for at least the next 12 months.
Considering our operating cash flow in the short-term, we can adequately dispose
of our current obligations including interest and principal of outstanding debt.
In addition, the operating cash flow should provide adequate liquidity to meet
our anticipated capital expenditure plans. We may not be able to continue our
acquisition strategy without ongoing financing from third parties.
Year 2000
Like many other companies, the Year 2000 computer issue creates risk for us. If
internal systems do not correctly recognize and process date information beyond
the year 1999, there could be an adverse impact on our operations. There are two
other related issues which could also lead to incorrect calculations or
failures: (i) some systems' programming assigns special meaning to certain
dates, such as 9/9/99, and (ii) the year 2000 is a leap year. The Year 2000
compliance issues stem from the computer industry's practice of conserving data
storage by using two digits to represent a year. Systems and hardware using this
format may process data incorrectly or fail with the use of dates in the next
century. These types of failures can influence applications that rely on dates
to perform calculations (such as an accounts receivable aging report), as well
as systems such as building security and heating.
We believe our internal exposure to Year 2000 issues is primarily limited to the
purchase of computer hardware, and to a lesser extent software, at some of our
divisions. We have conducted a program that includes a review of all computers,
software and related date-sensitive equipment used in the management of print
jobs, office automation, accounting, process
<PAGE>
control and other applications. This review program consisted of both
information technology and non-information technology systems. We have completed
our review program and begun corrective actions. Since July 1, 1998, Y2K
compliant MIS systems and corresponding hardware updates have been installed in
over 60% of the divisions. The installation of new divisional MIS
systems/hardware should be completed by August 30, 1999. Testing on non-MIS
systems should be completed by August 1, 1999 and corrective actions completed
by September 30, 1999. We anticipate the cost of such corrective actions will be
approximately $750,000 for the existing divisions. The due diligence process for
new acquisitions includes a Year 2000 assessment, with corrective action plans
scheduled for immediate implementation.
We believe our Year 2000 risk areas are focused on the loss of our ability to
operate due to (i) equipment malfunction or (ii) customer inability to forward
electronic images due to its own Year 2000 malfunctions. Should our information
technology systems fail, in spite of our efforts to meet Year 2000 compliance
standards, the failure could have a material effect on our ability to manage our
business including billing, collecting, disbursing and creating timely financial
reports. If a substantial portion of our equipment contains computer chips which
are not Year 2000 compliant, the equipment may not function after December 31,
1999, and, therefore, we would not be able to produce and deliver our product.
As part of the investigation process, our suppliers and other service vendors
have been asked to provide documentation on their Year 2000 compliance status,
and the majority have provided us with compliance assurances. Non-compliant
suppliers are subject to replacement. Each operating division has assigned a
Year 2000 compliance officer responsible for identifying local problem areas and
managing corrective actions. A meeting of the divisional Y2K compliance
officers working out the final testing and implementation steps is being held on
June 5, 1999. We also believe we have the capacity in place to provide the
expertise to customers to develop the electronic images necessary for respective
print jobs.
We have requested Year 2000 risk analysis compliance status reports from
customers and suppliers, to date we have received completed information from
over 60% of those surveyed. We expect that by September 30, 1999 we will have
over 90% response. Based on the results of this survey, we will formulate a
going forward plan on actions to be taken with non-compliant responders. We
expect this will be done by October 15, 1999. If a majority of our key suppliers
of raw materials such as paper, film, and plates have a disruption in their
ability to supply us, the results could have a material adverse effect on us
because we could not provide printed products to our customers. This would cause
a decline in revenue. In addition, if key customers have disruptions in their
operations due to Year 2000 compliance issues, the results could have a material
adverse effect on us due to the customers' reallocation of resources. We are
also developing contingency plans, which by their nature will continue to
evolve; with regard to a worst case Year 2000 scenario in which a particular
division is unable to perform, plans are being developed, and should be finished
in the second quarter of 1999, to shift work to other divisions.
If in the worst case scenario that Year 2000 issues of our equipment and
systems, our vendors, and/or our customers are not addressed satisfactorily, we
could experience a disruption in business that would cause a decline in earnings
and our cash flows. Contingency plans are now in place to shift work to other
divisions with regard to a worse case scenario in which a particular division is
unable to perform.
Impact of Recently Issued Accounting Standards
We do not believe that any recently issued accounting standards which have not
yet been adopted will have a material impact on our consolidated financial
statements. SFAS 133, Accounting for Derivative Financial Instruments, which
will be effective for our year ending December 31, 2000, is not expected to have
a material impact on our financial statements because SFAS 133 deals with
derivative financial instruments, which presently are not instruments that we
are involved in to a material extent. SFAS 131, Disclosure About Segments of an
Enterprise and Related Information, which is effective for our year ended
December 31, 1998 has not had a material impact on our financial statement
disclosures since we consider ourselves to be in the single reporting segment of
general commercial printing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risks were not material at March 31, 1999. As of that date, substantially
all of our interest bearing indebtedness bore interest on a fixed rate basis,
except for the $18.5 million term debt and the $2.6 million revolver line of
credit, which bore interest on a variable basis. We do not currently deal in any
derivative instruments nor are we exposed to any currency translation
fluctuations. We do not have any commodity derivative instruments because we
generally pass any paper price fluctuations through to our customers using the
product pricing.
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
From time to time, we may be involved in litigation relating to claims arising
in the normal course of business. We maintain insurance coverage in amounts
deemed adequate to cover potential claims. Current litigation that involves us
is not considered significant by management to our financial position or
operating results. While the outcome of lawsuits or other proceedings against us
cannot be predicted with certainty, we believe the outcomes of any of these
matters will not have a material effect on operating results or financial
position.
Item 2 - Changes in Securities and Use of Proceeds
In March 1999, Master Graphics issued 43,029 shares of its common stock valued
at $250,000 to the sellers in partial consideration for the acquisition of Woods
Lithographics. These shares of common stock were issued by Master Graphics in
reliance on the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, as amended, and the rules and regulations adopted
thereunder, as a transaction by the issuer not involving a public offering.
Item 6 - Exhibits and Reports on Form 8-K
(A) EXHIBITS
3.1* Charter of Master Graphics, Inc. (Exhibit 3.1)
3.2* Bylaws of Master Graphics, Inc. (Exhibit 3.3)
10.1** Third Amended and Restated Loan and Security Agreement dated as of
March 15, 1999 between Premier Graphics, Inc., a Delaware
corporation, and General Electric Capital Corporation, a New York
corporation, as Lender and as Agent to Lenders, Deutsche Financial
Services Corporation, a Nevada corporation, as a Lender and as
Revolving Credit Agent for Lenders, and Transamerica Equipment
Financial Services Corporation, a Delaware corporation, as Lender
(Exhibit 10.1)
10.2*** Stock Purchase Agreement dated as of March 15, 1999 between
Premier Graphics, Inc. and David Bornhoeft (Exhibit 2.1)
10.3*** Agreement and Plan of Merger dated as of March 15, 1999 between
Columbia Graphics Corporation and Premier Graphics, Inc.
(Exhibit 2.2)
11.1 Statement regarding computation of Per Share Earnings
27.1 Financial Data Schedule (for SEC use only)
- ------------
* Incorporated by reference to Master Graphics' Registration Statement on Form
S-1 (Registration No. 333-49861). The parenthetical exhibit number indicates
where the exhibit is found in that filing.
** Incorporated by reference to Master Graphics' and Premier Graphics'
Registration Statement on Form S-4 (Registration No. 333-71157). The
parenthetical exhibit number indicates where the exhibit is found in that
filing.
*** Incorporated by reference to Master Graphics' Form 8-K filed on March 29,
1999. The parenthetical exhibit number indicates where the exhibit is found
in that filing.
(B) REPORTS ON FORM 8-K
Form 8-K filed March 29, 1999 in connection with the acquisition of
Columbia Graphics Corporation.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Master
Graphics, Inc. has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MASTER GRAPHICS, INC.
By: /s/ Lance T. Fair
---------------------------------
Lance T. Fair
Sr. Vice President - Acquisitions
Chief Financial Officer
Date: May 13, 1999
/s/ P. Melvin Henson, Jr.
---------------------------------
P. Melvin Henson, Jr.
Sr. Vice President - Finance &
Administration
Chief Accounting Officer
Date: May 13, 1999
<PAGE>
EXHIBIT 11.1
MASTER GRAPHICS, INC.
COMPUTATION OF NET EARNINGS PER COMMON SHARE
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1999
---- ----
Net earnings $ 443 $ 753
Less preferred stock dividends 0 30
Less accretion of preferred stock discount 0 30
--------------------
Net earnings applicable to common shares 443 693
====================
Basic:
Weighted average common shares outstanding 4,000,000 7,894,818
====================
Basic earnings per share $ 0.11 $ 0.09
====================
Diluted:
Net earnings applicable to common shares 443 693
Plus preferred stock dividend and discount
accretion -- 60
Plus deferred compensation provision -- 12
--------------------
$ 443 $ 765
====================
Weighted average common shares outstanding 4,000,000 7,894,818
Assumed exercise of lender warrants 444,440 220,000
Assumed exercise of the stock option clause in the
deferred compensation agreements 0 100,000
Assumed conversion of preferred stock 0 177,776
--------------------
4,444,440 8,392,594
====================
Diluted earnings per share $ 0.10 $ 0.09
====================
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 46,080
<ALLOWANCES> (1,589)
<INVENTORY> 13,607
<CURRENT-ASSETS> 65,401
<PP&E> 100,262
<DEPRECIATION> 11,916
<TOTAL-ASSETS> 247,441
<CURRENT-LIABILITIES> 26,578
<BONDS> 130,000
1,467
0
<COMMON> 8
<OTHER-SE> 37,118
<TOTAL-LIABILITY-AND-EQUITY> 247,441
<SALES> 56,378
<TOTAL-REVENUES> 56,378
<CGS> 40,763
<TOTAL-COSTS> 50,671
<OTHER-EXPENSES> 287
<LOSS-PROVISION> 140
<INTEREST-EXPENSE> 4,674
<INCOME-PRETAX> 1,320
<INCOME-TAX> 567
<INCOME-CONTINUING> 753
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 753
<EPS-PRIMARY> 0.09
<EPS-DILUTED> 0.09
</TABLE>
